The world of digital payments has evolved dramatically over the past few years with so many digital payment trends coming forth. Consumers and merchants are now spoilt for choice when it comes to payment options. One of the biggest developments has been the rise of closed and open-loop wallets, both of which offer unique benefits and drawbacks for both parties involved.

According to a recent report by Transparency Market Research, the global mobile wallet market is expected to grow at a CAGR of 22.2% between 2022 and 2031, reaching a staggering $16.02 trillion by the end of the forecast period.

The above figures demonstrate the importance of digital wallets in the digital payment landscape with their widespread adoption helping merchants and customers.

Moreover, according to a 2022 Payments Compliance Report, 52% of businesses intend to introduce a closed-loop payment product in 2022. Additionally, a majority of 61% plan to develop such a product by the end of 2023. This shows the growing demand for closed-loop payments including wallets.


Apart from that, the success of open loop wallets like google pay has paved the way for exponential demand and growth of such wallets.

In this blog, we will explore all about closed loop wallets and open loop wallets, their pros and cons for merchants and customers, and their key differences to give you a complete insight into how to make an informed decision in implementing wallets into your business.

Closed Loop wallets

A closed-loop wallet is a payment system that operates within a specific network or ecosystem, allowing users to make transactions only within that closed network.

This means that closed-loop wallets are often associated with specific brands, retailers, or merchants, and can only be used to make purchases from those entities.

Some of the use cases of closed-loop payments are:

  • Starbucks Rewards: The Starbucks Rewards program is a closed loop wallet that allows customers to pay for their purchases using their mobile app.
  • Disney MagicBand: The Disney MagicBand is a closed loop wallet that is used at Disney World parks and resorts.
  • Subway Card: Paying for Subway sandwiches and other menu items is made easy with closed loop wallets. Customers can load funds onto the card and use it to make purchases at any participating Subway location.

Advantages of Closed Loop Wallets

Closed loop wallets are a type of mobile payment system that is only accepted by a specific merchant or group of merchants. They offer a number of advantages over traditional payment methods, including convenience, security, and customer loyalty. Let’s have a look at them.


For Merchants

Closed loop wallets are becoming an increasing merchant payment solution for businesses of all sizes, offering a range of benefits for merchants who adopt them.

Here are some advantages of closed loop system:

Increased Security

Closed loop wallets can provide merchants with added security features, such as two-factor authentication and fraud detection tools, to protect against fraudulent transactions.

Uber Cash, for example, allows Uber to offer a secure payment option to its customers while reducing the risk of payment fraud.

Improved Customer Experience

Closed loop wallets can provide a more streamlined and user-friendly payment experience for customers, which can improve overall customer satisfaction.

For example, Walmart Pay allows customers to quickly and easily pay for their purchases using the Walmart mobile app, without the need for cash or credit cards.

Enhanced Brand Loyalty

Closed loop wallets can help merchants build stronger relationships with their customers by offering exclusive discounts, rewards, and other incentives.

Starbucks Rewards offers customers free drinks, food, and rewards for using the mobile app to pay, driving engagement and repeat business.

Increased Control Over Customer Data

Closed loop wallets can give merchants greater control over their customer data, allowing them to collect, analyze, and use this data to improve their business operations and marketing efforts.

Merchants can use customer data to create better marketing by analyzing their spending habits, preferences, and purchase history.

Enhanced Marketing Opportunities

With a closed-loop wallet solution, merchants get valuable marketing opportunities, allowing them to promote their brand and products to customers through the app.

For example, the Target mobile app offers customers personalized product recommendations, special offers, and other marketing messages based on their purchase history and preferences.

Faster Payments

Closed loop wallets can facilitate faster payment processing, enabling merchants to receive funds more quickly and efficiently.

Because transactions within a closed loop mobile payments are processed within a secure and controlled network, they can be processed more quickly than traditional payment methods like credit cards or bank transfers.

For example, the Amazon Pay closed loop wallet allows customers to make purchases on Amazon and other participating merchants with just a few clicks, and payments are processed instantly.

Read more: Merchants’ Guide to Closed loop wallets and contactless payments

For Customers

Closed-loop wallets, also known as mobile wallets, offer a range of benefits for customers looking for a fast, secure, and convenient way to make payments.

These digital wallets provide a streamlined payment experience that can save time and hassle, while also offering rewards, discounts, and other incentives for frequent use.

In this section, we'll explore some of the key advantages of closed-loop wallets for customers.

Increased Convenience

Closed-loop wallets are an advanced mobile money solution that makes mobile payments easy by allowing customers to store payment information in the app and make purchases with a few taps, eliminating the need for cash or cards.

For example, the Apple Pay closed-loop mobile wallet platform allows customers to make purchases using their iPhone or Apple Watch, without the need for a physical card.

Improved Security

Closed-loop wallets provide customers with a secure payment option that can protect their financial information from fraud and theft.

Transactions within a closed-loop payment system are processed within a secure and controlled network, reducing the risk of unauthorized access or other security breaches.

For example, Samsung Pay uses tokenization technology to encrypt customer payment information and protect it from potential hackers.

Varied Rewards and Incentives

Closed-loop wallets can offer customers a range of rewards, discounts, and other incentives for using the app to make purchases.

For example, the Kohl's Wallet app allows customers to earn rewards points for their purchases, which can be redeemed for discounts on future purchases.

Budgeting and Spending Control

Closed-loop wallets can help customers better manage their finances by providing real-time information on their spending and account balances.

For example, the Google Pay closed-loop wallet allows customers to view their transaction history and track their spending, helping them stay within their budget and avoid overspending.

Enhanced Flexibility

Closed-loop wallets can be used for a variety of payment scenarios, from in-store purchases to online transactions and peer-to-peer payments.

For example, the Venmo closed-loop wallet allows customers to send and receive payments to other Venmo users, making it easy to split expenses with friends and family.

Disadvantages of Closed Loop Wallets

With numerous advantages of a closed loop system, it also comes with some disadvantages. Some of the disadvantages of closed loop system are:


For Merchants

Limited Acceptance

Closed-loop wallets may not be accepted at all merchants or within all ecosystems, which can limit the reach and convenience of this payment method.

Limited Functionality

Closed-loop wallets may have limited functionality compared to traditional payment methods, which can limit the options and convenience for customers.

Limited Options for Customers

Closed-loop wallets may not offer customers the same range of payment options as traditional payment methods. This can be a drawback for merchants who want to provide a seamless and convenient checkout experience for their customers.

Dependency on Third-Party Providers

Closed-loop wallets may require merchants to rely on third-party providers for processing payments and managing customer data.

This can create a potential point of failure if the third-party provider experiences technical issues, data breaches, or other problems that impact the merchant's ability to process payments.

For Customers

Compatibility Issues

In closed-loop wallets, customers can only use the wallet to make purchases at the merchant or retailer associated with the wallet. It can be challenging for customers who prefer to shop at different merchants or retailers.

Privacy Concerns

Since closed-loop wallets are tied to a specific merchant or retailer, the merchant can collect a significant amount of customer data.

This data can include purchase history, location data, and personal information. This can be a cause for concern for customers who value their privacy and do not want their data to be shared with third parties.

Open Loop Wallets

Open loop wallets are a type of digital wallet solution that allows users to make purchases with a variety of different merchants and businesses, regardless of whether or not those merchants have a direct relationship with the wallet provider.

Some real-life examples of open-loop wallets include:

  • PayPal: It allows users to link multiple payment sources, such as bank accounts and credit cards, to their accounts and use them to make purchases with a wide range of merchants.
  • Apple Pay: Apple pay wallet allows users to make purchases with their iPhone, Apple Watch, or iPad at a variety of merchants, both online and offline.
  • Google Pay: Google Pay wallet allows users to make purchases with their Android phone or other compatible devices. It can also be linked to multiple payment sources and used at a variety of merchants.

Advantages of Open Loop Wallets

Open loop wallets are a type of digital wallet that allows users to make payments at a variety of merchants. They are linked to a user's bank account or credit card, and can be used to make purchases in-store, online, or in apps. Open loop wallets offer a number of advantages over traditional payment methods, including:


For Merchants

As digital payments continue to gain popularity, merchants are constantly looking for ways to improve their payment systems.

The use of open loop wallets allows customers to use funds from various sources, such as credit cards, bank accounts, or even other digital wallets, to make purchases.

Here are some prominent advantages of open loop system:

Wide acceptance

Open loop wallets allow customers to use a variety of payment methods, making it easier for them to complete transactions.

This means that merchants who accept open loop mobile payments can attract a wider range of customers, including those who prefer to use a specific payment method.

For example, merchants who accept Apple Pay can attract iPhone users who prefer to make payments using their devices.

Increased sales

By accepting open loop wallets, merchants can make it easier for customers to complete transactions, leading to increased sales as these wallets eliminate the need for customers to enter payment information manually, which can be time-consuming and frustrating.

For example, if merchants are accepting payments through PayPal, they can enhance their sales by providing a simplified checkout process to their customers.

Increased security and reduced fraud

Open-loop wallets enhance security and reduce fraud compared to traditional payment methods by using advanced encryption and tokenization technology to safeguard customer information.

For example, if merchants accept Samsung Pay, they can benefit from Samsung's Knox security platform, which uses encryption and biometric authentication to protect customer data.

Increased customer loyalty

Merchants can boost customer loyalty by providing a flexible payment system that lets customers use their preferred payment method, which makes them more likely to return.

For example, merchants with the option of Venmo can appeal to millennials and Gen Z customers who prefer to use digital payment methods.

Improved payment processing times

Open-loop wallets use near-field communication (NFC) technology, which enhances payment processing times and efficiency, improving them over traditional payment methods.

For example, merchants who accept Google Pay can benefit from Google's fast payment processing times, which can help to reduce wait times for customers.

Increased flexibility

Open loop wallets can offer increased flexibility for merchants, as they can be used in a variety of settings.

For example, if a merchant has a payment option on the Square app, he can use the Square reader to accept payments in-person, online, or even over the phone.

For Customers


Open loop wallets provide customers with a convenient way to make payments with varied payment methods to complete transactions.

This means that customers can choose to pay with their credit card, bank account, or even another digital wallet, depending on their preference.

For instance, customers with Apple Pay can pay for purchases using their iPhones, without the need to enter their payment information manually.

Increased security and privacy

These wallets offer increased security and privacy for customers, compared to traditional payment methods through advanced encryption, and tokenization technology to protect customer information.

For example, with Google Pay, customers can benefit from Google's advanced security features, such as two-factor authentication and the ability to lock the app with a PIN.

Enhanced budget management

These wallets can help customers manage their budgets more effectively, as they allow for real-time tracking of transactions.

This means that customers can see exactly how much they have spent and where helping them to stay on top of their finances.

Loyalty rewards

Open-loop wallets offer loyalty rewards like cash back or future discounts, incentivizing customers to use the service more and leading to cost savings.

For example, customers who use the PayPal Cashback Mastercard, which is linked to the PayPal open loop wallet, can earn 2% cashback on all purchases.

Access to additional features

It gives access to additional features, such as the ability to send money to friends and family or to pay bills. This adds to the overall convenience of the service and makes it more appealing to customers.

For example, customers using Cash App can send money to friends and family instantly, without any fees.

Disadvantages of Open Loop Wallets

Open wallets are known for their advantages for both customers and merchants with their widespread acceptance. But they too have some drawbacks. Some of the disadvantages of open loop system are mentioned below:


For Merchants

Open-loop wallets offer a convenient and efficient way to make purchases, as users can store multiple payment methods in a single account.

However, for merchants, there are several disadvantages associated with open-loop wallets that can impact their bottom line. They are:

Additional Costs

Merchants need to invest in equipment such as card readers or point-of-sale terminals, which can be a significant upfront cost.

Moreover, there are transaction fees associated with accepting payments through open-loop wallets, which can eat into a merchant's profits.

Merchants may also be vulnerable to chargebacks, which can result in lost revenue and additional fees.

Limited Access to Customer Data

With open-loop wallets, customers can store multiple payment methods in a single account, which can make it difficult for merchants to track and analyze customer spending habits.

This lack of data can make it challenging for merchants to personalize marketing efforts or identify areas for improvement in their business.

Integration Challenges

Integrating open-loop wallets can be tough for merchants. They may have to collaborate with a third-party provider, incurring extra charges and technical complexities.

Additionally, open-loop wallets' incompatibility with some payment systems may limit merchants from accepting payments from diverse customers.

For Customers

While there are advantages to using open-loop wallets, there are also several disadvantages that customers should be aware of. They are:

Compatibility Issues

Open-loop wallets may not be compatible with all merchants, restricting customers from using them for purchases. Some merchants only accept specific types of open-loop wallets, limiting customer options and causing frustration for those who prefer them for all purchases.


Using an open-loop wallet can result in transaction fees for each purchase and fees for loading or withdrawing funds. These fees can add up over time, decreasing the wallet's convenience and value.

Closed Loop vs Open loop wallets - A comparison

Now that we know what closed and open loop wallets are and have been acquainted with their core advantages and disadvantages. Let's have a look at the key differences between the two.

FactorClosed Loop WalletsOpen Loop Wallets
UseLimited to a specific merchant or group of merchantsCan be used at multiple merchants and payment networks
Loyalty ProgramsOften linked to merchant-specific loyalty programsMay or may not offer loyalty programs
FeesMay have lower transaction fees or no fees at allMay have higher transaction fees or fees for certain features
SecurityTend to be more secure due to limited useSecurity depends on the specific wallet and payment networks used
IntegrationIntegration may be easier since it is limited to one merchant or group of merchantsIntegration may be more difficult due to the multiple merchants and payment networks involved
Customer DataMerchants have access to more customer data for targeted marketing and loyalty programsLimited customer data for merchants to access
FlexibilityLess flexible since they can only be used by a specific merchant or group of merchantsMore flexible since they can be used at multiple merchants and payment networks
Transaction LimitOften have lower transaction limitsOften have higher transaction limits

Factors to consider when choosing between Closed and Open Loop Wallets

When choosing between closed and open loop wallets, there are several factors to consider that can impact your overall experience. Here are some of the key factors to keep in mind:

FactorClosed Loop WalletsOpen Loop Wallets
AccessibilityLimited to specific merchants or group of merchantsCan be used at multiple merchants and payment networks
Loyalty ProgramsOften linked to merchant-specific loyalty programsMay or may not offer loyalty programs
SecurityTend to be more secure due to limited useSecurity depends on the specific wallet and payment networks used
ConvenienceMay offer faster checkout and targeted promotionsMay require additional steps for setup and usage
FeesMay have lower transaction fees or no fees at allMay have higher transaction fees or fees for certain features


Closed loop and open loop wallets have become essential in the digital payment sector, benefiting both merchants and customers. While there are drawbacks to consider, the advantages they offer are undeniable.

By exploring the pros and cons of both types of wallets, as well as the factors to consider when choosing between them, you can make an informed decision about which one is best for you. So, whether you opt for a closed or open-loop wallet, you can enjoy the convenience and security of digital payments

DigiPay.Guru offers both advanced open-loop and closed-loop wallet solutions to provide merchants with both their self-branded wallets and other popular open loop wallets so that the users can have a seamless experience and varied options at the same time.


Nikunj Gundaniya

Product manager of, one of the leading digital wallet solution. He is a visionary leader whose flamboyant management style has given profitable results for the company. He believes in the mantra of giving 100% to his work.

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